Deeming fiction for Indian accrual cannot extend to resident's foreign income absent clear statutory language

Foreign income of a resident assessee was not brought within the deeming fiction of Section 42 as income accruing or arising in British India, because Section 42 was structured as a special provision for non-residents and special cases rather than a general rule converting foreign accrual into Indian accrual. Read with Section 4(1)(b), income shown to have accrued outside British India remained outside the deemed Indian source. On that basis, the assessee retained entitlement to the deduction under the third proviso to Section 4(1).

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Issues: Whether income accruing outside British India to a resident assessee was liable to be brought within the deeming provision for income accruing or arising in British India under Section 42, so as to deny the exemption under the third proviso to Section 4(1).

Analysis: Section 4(1)(b) separately dealt with income accruing or arising in British India and income accruing or arising without British India, while the deeming language of Section 4(1)(b)(i) did not extend to income already shown to have accrued outside British India. The structure and marginal note of Section 42 indicated that it was intended to operate in the case of non-residents and to provide for special cases, rather than to define deemed accrual in India for residents generally. Reading the provisions together, the foreign income of a resident assessee did not cease to fall under Section 4(1)(b)(ii) merely because Section 42 might otherwise be invoked.

Conclusion: The income in question was not to be treated as income deemed to accrue or arise in British India under Section 42, and the assessee was entitled to the deduction under the third proviso to Section 4(1).

Ratio Decidendi: A provision deeming income to accrue or arise in British India, when framed as part of a special scheme for non-residents, cannot be extended to resident assessees so as to convert foreign-accruing income into Indian-accruing income absent clear statutory language.

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